I know this is a question that’s been explored countless times in the personal finance blogosphere, and it appears from my reading of various blogs that the general consensus on where to stash an emergency fund is an online savings account like ING (not an affiliate). I’ve thought about it. The interest rate is attractive, as is the liquidity of the money. But I hesitate at the thought of giving my private information (and Marc’s as well) to yet another institution. And to be honest, I’m still ever so slightly reluctant to trust a purely online account. (Stodgy of me, I know. I freely admit it, but that’s how it is.)
Before I go into our other options, let me tell you that I do my “regular” banking at one of the country’s largest banks. This bank holds the accounts I use to pay bills, where our direct deposit checks go, and where our emergency funds are currently stashed. The interest rates on savings accounts are extremely low, but I get the convenience of ubiquitous branches and well, I’ve got a whole system set up for paying bills and I don’t have the inclination to change things (for the time being). However, that extremely low interest rate has been bugging me.
So, back to our emergency fund. I’ve thought about the higher-interest money market fund at our credit union (currently 4%), where we already have a couple of accounts. But since it’s not the institution that I do my day-to-day money managing with, transferring money in an emergency could get complicated and most importantly, result in unacceptable delays.
For the last year or so, our emergency fund has been split between a 6-month CD ladder and the money market fund we’ve always had. I had intended to transfer more of the funds in the money market to the CDs, but I just got uncomfortable tying up our money that way (even though it is more than 6-months’ worth of expenses). The lack of liquidity quite simply made me uncomfortable. If the rates had been higher, I would have been more willing to invest in the CDs, but 2.8% always made me feel like the non-liquidity wasn’t worth the interest.
So I kept thinking about ING or some other online bank with a high-interest savings account. I looked harder at the options offered by our credit union. I briefly checked out the options at USAA, which holds most of our investments. But I kept coming back to one thing: I handle the money management in our family, but what if something were to happen to me? It became clear that while maximizing our income was important, so was simplicity in the event of an unthinkable emergency.
I did what people have done for eons when torn in two directions: I compromised. We opened a liquid CD account with most of the money in our money market account. As the 6-month CDs mature, I’ll roll them over in the liquid CD and six months from now, our entire emergency fund will be in that account and earning a tiered interest rate of 3.1% while giving us greater access to our money in the event of an emergency.